The management of Cackowski Corporation has been concerned for some time with the financial performance of its product I11S and has considered discontinuing it on several occasions. Data from the company's accounting system appear below:

In the company's accounting system all fixed expenses of the company are fully allocated to products. Further investigation has revealed that $185,000 of the fixed manufacturing expenses and $132,000 of the fixed selling and administrative expenses are avoidable if product I11S is discontinued.
-What would be the effect on the company's overall net operating income if product I11S were dropped?
A)Overall net operating income would decrease by $46,000.
B)Overall net operating income would increase by $93,000.
C)Overall net operating income would increase by $46,000.
D)Overall net operating income would decrease by $93,000.

Question

The management of Cackowski Corporation has been concerned for some time with the financial performance of its product I11S and has considered discontinuing it on several occasions. Data from the company's accounting system appear below:

In the company's accounting system all fixed expenses of the company are fully allocated to products. Further investigation has revealed that $185,000 of the fixed manufacturing expenses and $132,000 of the fixed selling and administrative expenses are avoidable if product I11S is discontinued.
-What would be the effect on the company's overall net operating income if product I11S were dropped?
A)Overall net operating income would decrease by $46,000. 
B)Overall net operating income would increase by $93,000. 
C)Overall net operating income would increase by $46,000. 
D)Overall net operating income would decrease by $93,000.

Quizplus · Accepted Answer

Dropping product I11S would result in a decrease in contribution margin of $93,000 (calculated as 5,500 units * $17 per unit). As net operating income equals total revenues minus total expenses, a decrease in contribution margin would result in a decrease in overall net operating income. Therefore, overall net operating income would decrease by $93,000 if product I11S were dropped.

The Management of Cackowski Corporation Has Been Concerned for Some